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JC: The audio interview referenced earlier this week has me talking a bit about the mournful ArsDigita episode. My VCs weren’t necessarily evil or motivated by a larger goal as far as I could tell. Most of what they did can be explained, in my opinion, by their lack of experience operating a business and (false) assumption that what is conventional for established monopolists such as IBM is ipso facto profitable for obscure startups.

Philip: What you did not tell us is probably some gut wrenching lessons you had learnt (having AD folded): cede power and made impotent.

However, VCs have a ‘greater’ goal when they took over your benign business model. It is their goal to kill off ventures like AD. You see AD’s openess would’ve given anyone (who’s smart coupled with a bit of hardwork) a fair chance to succeed emulating your model, and that is not right in the business world, which is really not much but you say the word – looting.

Back to your point…

“Tyco guys really didn’t loot very much at all it seems to me. Compared to the value of the company and its profits they took what must be regarded in 21st century America as a normal share.”

Did they loot? – yes
Is ‘looting’ a crime? – probably not… yet
Did other people loot more? oh yeah!
Is it time to ‘make an example’ out of somebody? Definately
Should it by the TYCO execs? Good as any!

I am reminded of the Savings and loan fiascos of the late ’80’s. Some guys with money realized that the combination of a financial institution with liberal reporting rules (savings and loans) and a metropolitan area with expansive growth and farm land at it outskirts (phoenix, austin, denver, etc…) would make for a cash-generating-machine. Basic idea, one guy buys land dirt cheap, has it assessed for higher value, next guy buys land from first, has land assessed at higher value. This goes on ad-infinitum, or until the shareholders in the s&l (usually pensioners and that lot) catch on to the hoo-haa, call their congressmen, and somebody gets scapegoated (charlie keating)…

In the end we get re-evaluated land values and stricter S&L reporting rules.

So, what we really need is some public outrage, scared congressmen and federal oversight of executive compensation…

Oh yeah, I’m gonna hold my breath ’til that happens…

Folks here seem to be admiring me for having been a corporate looter myself. It is true that I was once CEO of a company. It is also true that I no longer need to work for a living. Sadly, however, I was not CEO of a public company nor a hired-in CEO who was able to look from investors of an established company. My wealth, such as it is, comes from having sold a company that I built with my own cash. I.e., I invested in a high-risk enterprise. Characteristic of high-risk investments is that they will either go totally bust or they will return several hundred percent. Oftentimes people fall into the trap of believing that they are smart because their investments did better than the S&P 500. It may be that they simply took more risk and got lucky. That’s me!

A corporate looter, however, takes no risk. He shows up for work and draws a paycheck of, say, $50 million on the shareholders’ checking account. He risks no money of his own in order to earn this $50 million and in fact may do nothing different than a manager who gets paid $200,000/year. All that he really needs to do is nominate friends to the Board instead of strangers. And who doesn’t enjoy working with friends?

So for sure I wish I’d been a corporate looter but it was never an option because I’m an engineer and not a professional manager.

Back to the point of the entry, however, the Tyco guys really didn’t loot very much at all it seems to me. Compared to the value of the company and its profits they took what must be regarded in 21st century America as a normal share.

Couple of axioms:

1) Nobody is ever paid what they are “worth”. Everyone is either paid too much or too little. Period.

2) People like Skilling and Welch become what they are, good or bad, because they have taken to heart point 1 above.

So these current cadres of “Captains of Industry” play a little numbers game and suddenly everyone lines up at the trough wanting a piece of the pie. The cadre gets a couple of backslaps and pretty soon they realize that streching the truth is what they are being paid to do.

When the stuff in the trough turns out to be poison, the cadre is crucified. Everyone is all fine and dandy with their own moral imparity until they notice someone else’s.

Is it getting worse? I think it is. Corporate Executive Compensation is totally out of line with earnings still, the numbers being reported in the annual reports do not reflect what is being reported to the IRS and market valuation of stock is much higher than it should be compared to earnings. Those are the three top indicators of cooked books, and you’re buying it.

I had an interesting conversation with my CFO while we were on a fact-finding-mission regarding budgeting software. We were talking about companies like enron and the current ‘best practices’ that industry follows (okay, mebbe I was using the term ‘bean counters’ and doin some finger pointing also). The CFO made the suprisingly good point that if he does not pursue every avenue to ‘enhance shareholder value’ then he may be sued by the shareholders for not doing his job…

Funny world, eh.

I’ll second the suggestion to read Buffett’s comments. You can find them in the 2003 report.

OTOH, let’s keep in my mind that the worst you can say about these CEO’s (except in cases of outright fraude) is that they did what the shareholder’s simply allowed them to do. Those companies belong to the shareholders and not their employees. If the shareholders allow themselves to get screwed it’s nobody’s business but their own.

If a CEO is making a salary that you consider to be too high, simply don’t buy shares in that company. It’s not your money they’re taking.

Buffett has interesting ideas about corporate management and governance, far more developed than the typical “looting is bad, m’kay” sentiments that most commentary amounts to. Read the shareholder letters at http://www.berkshirehathaway.com/. Highly recommended.